Australia’s level of housing debt could prove to be a ticking time bomb, Standard & Poors has warned. What’s fuelling the agency’s fears?

According to a Fairfax report, the latest Standard & Poors (S&P) report on Australia’s sovereign debt rating has issued concerns that the country’s high level of household debt could see the property market hit the rocks if economic conditions don’t continue to work in its favour.

The country’s level of unemployment, in particular, was singled out as a factor that could affect the housing market.

“The sustainability of high household debt levels has not been tested in an environment of high unemployment for a long time,” said the report.

“Australian house prices, relative to household incomes, are also elevated. While there has not been a build-up of aggregate excess supply, the housing market continues to appear somewhat vulnerable to a downturn, in our view.”

The overall picture of Australia’s economic health, however, remains cautiously optimistic according to S&P, and its fundamentals are expected to keep its AAA rating intact.

RBA offers hope

The RBA has offered some positive commentary on the property market, with governor Glenn Stevens stating in his opening statement to House of Representatives Standing Committee on Economics that “housing investment should strengthen given that several factors are supportive”.

“Interest rates are low, housing prices are tending to rise, gross rental yields have increased, population growth remains strong and is even picking up a little,” he added, noting, however that “admittedly, we are as yet very early in this phase”.

Stevens also noted that the share of household income devoted to interest payments has declined considerably.

“Indeed housing ‘affordability’ as conventionally measured, for purchasers, has improved a lot over the past two years,” he said.